Why IRS Spotlight Could Fall on Logan Paul and Other Rich Americans in Puerto Rico

A clutch of US citizens is coming under scrutiny over fat tax breaks the island offers…
by Lynnley Browning

Last month, IRS Commissioner Danny Werfel jolted some of the thousands of Americans living part-time in Puerto Rico when he disclosed that the agency had “recently identified about 100 high-income individuals” claiming lucrative tax benefits there while skirting strict residency and source of income rules.
The individuals, Werfel warned, “are attempting to avoid U.S. taxation on U.S. source income, and we expect many of these cases to proceed to a criminal investigation.”

That shot across the bow on July 14 sent lawyers and accountants scrambling to alert their clients in the U.S. territory. Their message to the estimated 5,000 or so American entrepreneurs, traders, crypto bros, real estate investors, and white-collar professionals enjoying the Caribbean island’s sunshine and tax benefits: Make sure you’re playing by the residency rules of 183 days a year on the island. And don’t dodge U.S. mainland tax bills.

“Now, before the tax man knocks on the door, is the time for those with a potential issue to take action,” wrote law firm Caplin & Drysdale, which has large tax disputes and tax litigation practice, on July 27. And if you’re well-known, other lawyers said, be extra-cautious.

“They go for high-profile targets because you get maximum deterrence,” said Bryan C. Skarlatos, who specializes in criminal tax investigations and white-collar criminal prosecutions at the law firm Kostelanetz in New York.

Carlos F. Ortiz, a partner at Baker Hostetler in New York who focuses on high-risk tax and money laundering controversies involving multinational corporations, partnerships, and individuals, New York, agreed. The Internal Revenue Service “typically looks for high-profile individuals to make an impact. They’re looking to make examples, and by that they’re looking to indict folks.”

Bold-Faced Names
Several thousand Americans, including a handful of bold-faced names, have flocked to the island in the past decade to take advantage of its unusually generous tax benefits — one for companies, the other for individual investors.

In 2013, hedge fund billionaire John Paulson became the poster child for opportunities on the island, which he once compared to the offshore tax haven of Singapore, when he bought the St. Regis Bahia Beach Resort, less than an hour east of the capital San Juan. Paulson later snapped up majority stakes in the Condado Vanderbilt Hotel, La Concha Resort, and Condado Ocean Club, all luxury venues.

But Paulson doesn’t live half the year on the island. His name doesn’t appear in the Puerto Rican government’s official list of individuals granted permission for a tax break on their investment income. As for the corporate break, he’s not eligible for that as far as his elite properties go — that benefit is only for services exported from the island, not for running a hotel or club on the island.

So why is Paulson in Puerto Rico? Because real estate values have skyrocketed in recent years. Despite filing for bankruptcy in 2017, the largest public debt restructuring in U.S. history, the island’s luxury real property market is booming. Sotheby’s most expensive listing is for a $44.9 million, 5,611-square-foot, 5-bedroom mansion in the island’s gated Dorado community. Stuart Merzer, chief lawyer and compliance officer at Paulson & Co. in New York, didn’t respond to requests for comment.

Other investors have gone all-in on the incentives. The founder and managing partner of $3.5 billion hedge fund Pantera Capital, Daniel W. Morehead, won approval for the individual tax break on Oct. 21, 2022, Puerto Rican records show. An entity related to the Menlo Park, California-headquartered firm, Pantera Capital Management Puerto Rico LP, gained permission last Feb. 13.

Cryptocurrency entrepreneur Brock Pierce, a former child actor who starred in Disney’s “The Mighty Ducks” movie and ran unsuccessfully in the 2020 presidential campaign under the slogan “Brock the Vote,” won approval in October 2018.

Last Feb. 14, authorities granted the incentive to 1800Bitcoin LCC, a Puerto Rican entity owned by crypto entrepreneur Jordan E. Fried, the chief executive officer of Immutable Holdings, a blockchain holding company that trades on the “over the counter” market. Fried first won approval for personal use of the incentive in October 2021, territory records show.

New Poster Child
Puerto Rico’s current poster child is Logan Paul, a popular social media influencer, WWE wrestler, and entrepreneur, who moved to the sunny island in 2021 and won official permission to use its tax incentives.

There’s no evidence that Paul — the 6’ 2” globe-trotting face of the wildly successful PRIME sports drinks — might be audited by the IRS.

Mark H. Leeds, a lawyer for Paul at Mayer Brown in New York who advises roughly 100 Americans enjoying the tax breaks, told The Messenger: “There is a huge range of people who have moved to PR to take advantage of the tax benefits. On the one hand, there are the people who come to me. Anybody who’s taking the time and money to come to me, or someone like me, is looking to do it right. They’re not looking to play it fast and loose.”

At the same time, leading lawyers who specialize in sophisticated tax strategies for the wealthy say that if history is any guide, the IRS’s focus on big names is sobering. “Mr. Paul would want to be very careful,” Skarlatos said. “And want to have good advisors structuring his affairs.

Spokespersons for Paul, who on his YouTube channel calls himself a “27-year-old in Puerto Rico living life to the fullest or whatever” (he’s 28), declined to comment.

No Capital Gains
Puerto Rico’s perfectly legal perks, in place since 2012, allow American mainland citizens who live on the island for at least half the year to enjoy no U.S. taxes on gains on their stocks, investment funds, and other property that materializes after moving to the island. There’s also no Puerto Rican tax on those capital gains, or on dividends or interest.

It’s a huge boost to the wallet — a savings of 23.8% in long-term capital gains tax and up to 37% for short-term gains on assets sold after one year or less. A hedge fund manager or crypto trader who moves to the island and owns stocks or digital currencies that later soar in value faces no U.S. tax on those profits.

Island transplants can also avoid the U.S. corporate rate of 21% and top 37% rate on partnerships and other private entities. If they own a Puerto Rican company that performs services on the island for customers and companies off island, they pay just 4%.

Paul, age 28, was granted a “decree” for both the individual and the corporate tax breaks by Puerto Rican authorities on Nov. 22, 2021, official territory records show.

Living on Island
As of 2019, more than 4,200 U.S. companies and Americans had received “decrees,” a U.S. House Committee on Appropriations study found. Ortiz of Baker Hostetler estimated the total number is now closer to 5,000. In 2019, the island consolidated the individual benefit, known as Act 22, and the corporate benefit, called Act 20, into a new law, Act 60.

The Caribbean Island is as known for its tax incentives and its rum. Kris Connor/Getty Images for Puerto Rico Industrial Development Company

In its burgeoning crackdown, IRS agents are likely to first go after the low-hanging fruit: Whether someone claiming zero capital gains on investment profits meets the residency requirement.

The residency rules are both prickly and squishy, and an American must satisfy one of five: Spend at least 183 days in Puerto Rico throughout the tax year. Or at least spend 549 days on island throughout the current and previous two tax years, including at least 60 days per year. Or spend no more than 90 days in the U.S. throughout the tax year. Or earn no more than $3,000 in the U.S. and spend more days in Puerto Rico than on the mainland.

The vaguest rule is: have “no significant connections to the U.S. throughout the tax year,” according to PReocate, a consulting firm in San Juan that charges $1,995 to shepherd individual investors through the process. An individual gets 30 “free” international travel days that count as Puerto Rican days, as long as that time is spent outside the U.S.

Skarlatos said anyone under audit would also want to show proof of visits to local doctors, voting records in local elections, enrollment of any children in a local school (unless they’re at boarding school on the mainland or abroad) and participation in local professional and civic organizations. “You can’t just visit a condo on the beach,” he said.

$55,000 a Month
So where does Paul live? A May 2021 video posted on YouTube by AHR, also known as Any Home Realty and Any Home Real Estate, gave a tour of the 5-bedroom, 5,200-square-foot house with swimming pool that he and his brother, boxer Jake Paul, were renting in the luxurious Dorado Beach community at the Ritz Carlton Reserve. The brothers were paying $55,000 a month for the $10 million estate, built by Kevin Thobias, an American transplant to Puerto Rico who drives a gold, bullet-proof Rezvani tank with a rear smoke screen. Thobias spent four years in the U.S. Air Force and now lives in Dorado, according to his Facebook page.

It’s not clear if Paul owns property on the island. Giovanni Mendez, a tax lawyer in San Juan, said the pre-2019 version of the individual tax break didn’t require people to buy a home. But the new Act 60 version does, within two years of being granted a “decree.” That means come November, Paul — presumably with his fiancée, Danish model Nina Agdal, to whom he got engaged this month — would need to buy a house on island if he hasn’t already done so.

Claiming the tax break of 4% on corporate profits is tricker. That’s because it depends on how a Puerto Rican entity arranges with a U.S. mainland company to receive profit distributions.

J. Clark Armitage, an international tax lawyer at Caplin & Drysdale in Washington, D.C., said that when a Puerto Rican entity is set up to provide services to a U.S. mainland company, the owner of the island entity effectively becomes the “principal service provider” to that U.S. company.

The owner doesn’t owe U.S. tax on the money he receives through the island entity, provided the services are rendered from Puerto Rico. A pricing agreement between the Puerto Rican entity and the U.S. company determines how much the Puerto Rico entity should be paid for its services. The more valuable the owner of the Puerto Rican entity is to the success of the U.S. company, the more he can charge for his services to the U.S. company, Armitage said.

Prime Target?
PRIME sports drinks, launched in 2022 through a Delaware company, Prime Hydration LLC, is the brainchild of Logan Paul and KSI, a British YouTube star, rapper and boxer who is Paul’s close friend and business partner.

The drinks are manufactured and sold by Congo Brands, a private company in Louisville, Kentucky, that’s owned by two entrepreneurs, Max Clemons and Trey Steiger. Congo has multiple entities in the state and Delaware. A British subsidiary, FIX LINK: Prime Hydration UK Ltd., is fully owned by Clemons and Steiger. Paul is one of six shareholders, along with Clemons and Steiger, in Prime Hydration LLC, Kentucky state records show.

The beverages have the sports drink industry — and lawmakers — buzzing. One 12-ounce can of PRIME Energy has more caffeine — 200 milligrams — than six cans of Coke or nearly two cans of Red Bull. U.S. Senate Majority Leader Chuck Schumer, a New York Democrat, wrote on July 10 to Food and Drug Administration Commissioner Robert M. Califf asking him to investigate this “summer’s hottest drink” and “status symbol” as “a serious health concern for the kids it so feverishly targets.”

Paul told Australia’s biggest talk radio show in February that sales of Prime drinks totaled $250 million in 2022, their first year, with $110 million “gross internally.” This January, he added, sales were $45 million. In June 2022, he told the British podcaster True Geordie that if he were to sell his stake in PRIME, “my number’s $5 billion. Which I think we’ll hit in three years.”

If his share of those revenues benefit from Puerto Rico’s incentives, that’s potentially a lot of tax-free profits — and possible scrutiny.

Where in the World Is Logan Paul?
On July 9, Paul proposed to Agdal at Lake Como, Italy.

On April 6, he posted a video of himself taking an ice bath in a large metal container at his ranch in the San Jacinto mountains, an estate that was once used by LSD guru and Harvard professor Timothy O’Leary.

Five days earlier, he performed before 80,000 people on his 28th birthday at WrestleMania at the SoFi stadium in Inglewood, California, centering on a zip line.

On March 31, he posted a video of himself at Dodgers Stadium in Los Angeles to celebrate PRIME’s new partnership with the baseball team. The month before, he posted a photo of himself in Riyadh, Saudi Arabia.

On Feb. 14, Paul posted a photo of himself in Sydney, Australia, with KSI, feeding a baby kangaroo with a bottle.

Four days earlier, he posted a photo of himself in Perth, Australia, posing on the ground next to a stout and cheerful squirrel.

Referring to the view IRS agents might take of a Puerto Rican ex-pat, David Lesperance, a tax and immigration lawyer in Toronto, said, “I can just look at your Instagram and go, ‘Oh, here you are in Ibiza. Here you are there. You’ve spent none of the winter in Puerto Rico.’ You’ve got to be on the island, and you’ve got to know, is this a sustainable plan?”